NACDS Cost to Serve

March 16th, 2009

2009 Accenture. All rights reserved.

Introductions

Ken Silbert Accenture Managing Partner, Supply Chain Practice

Milton Merl Accenture Partner, Accenture Marketing Sciences Global Lead Merchandising & Trade Marketing

2009 Accenture. All rights reserved.

4 Key points to takeaway from todays session

Nowadays, supply chains need to be dynamic and able to deal with permanent volatility In challenging economic times, the best companies look for both short term and long term initiatives to position themselves for the eventual economic turnaround Companies need to look across the entire value chain as they best determine where to conduct various activities Cost to Serve (C2S) is a proven / efficient strategy to maximize overall profitability and make informed business decisions

2009 Accenture. All rights reserved.

Agenda
Strategic Context C2S Overview C2S in Action C2S Approach C2S Key Success Factors Questions

2009 Accenture. All rights reserved.

Why Focus on Cost to Serve (C2S)?

In todays economic environment where most retailers and manufactures alike are facing continuous pressure to maintain competitive prices and profitability the importance of developing a deep understanding of the true and complete cost of serving a customer is not only necessary, but a strategic differentiator of high performers In the current economic environment, it is increasingly difficult to obtain credit or financing for working capital and operating expenses Organizations are seeking opportunities to more efficiently deploy limited resources and funding Supply Chains are becoming increasingly complex, and while companies capture vast volumes of supply chain data, they often lack the processes, organizational skills and the technology to translate this data into actionable/insightful information Not enough manufacturers, distributors or retailers have been able to develop and institutionalize a comprehensive view of the supply chain costs incurred in delivering a product end to end (vendor to store shelf) Incomplete or worse yet, incorrect information, can often lead to organizations establishing and promoting profit eroding behavior amongst its supply chain partners . . . Cost to Serve is a capability enabling companies to make better informed decisions
2009 Accenture. All rights reserved. 4

Strategic Context historical perspective

In 2008, Accenture conducted a major supply chain research effort with the goal of defining the strategic and operational differentiators of high performers The first step was to look at historical performance of companies that had invested selectively in Supply Chain capabilities in different parts of the business cycle.
Performance comparison following the 1990 1991 recession
Average ROIC Relative to Industry

Impact of supply chain performance on companys valuations

Relative Market Cap CAGR (percentage points) +30% +20% +10% Transformers Leaders Laggards -10% Decliners -20% Industry Avg.

Supply Chain Performance Category

19941997

19972000

Masters invest in capability regardless of the business cycleand reap the rewards
Source: Accenture research, 1998-2006

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Strategic Context
2008. . . A Year of Volatility
A Volatile Market - In 2008, the price of oil changed 5% or more from its previous close on 39 days, making it the most volatile year since 1990.

Source: D. Simchi-Levi, MIT

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Strategic Context
an era of permanent volatility
Of all the challenges facing companies today, it is clear that this new era of permanent volatility is driving the largest number of SCM failures.
-- Erosion of Asset Value -500 400 300 200 100 0 J-03 Major Global Stock Indexes

Expectations are up, lifecycles are down, and supply chains are not prepared to respond Global economic forces affect everyone

-- Volatile Commodity Prices -- Price Producer Index of selected commodities (1960 2008)

J-04 J-05 FTSE100 J-06 J-07 J-08 ShangComp S&P 500 Nikkei225

Nearly instant commoditization of worthwhile innovations Increasing ability to rapidly leverage low-cost labor Rapid swings in availability of key resources (energy, metals, etc.)

Value

-- Currency Fluctuations -USD vs. Other Currencies

1.30 1.20 1.10 1.00 0.90 0.80 0.70 0.60 2005 2006 2007 2008 2009 CNY EUR GBP JPY BRL

Commodities and transport are an increasing share of COGS, continuously shifting the total cost of ownership equation Global footprints make companies vulnerable to volatility in multiple capital markets Government policies increasingly unpredictable around tariffs, taxes, and even sustainability Forecast error by definition, increases with volatility favoring responsiveness over traditional planning

-- Geopolitical Events -Events

A LL G A S H U T S O FF R U S S IA S S T O EU R O P E D E LI V ER IE
1 9 M ILL IO N T O YS SH IPP ED FRO M CH IN A RE CA LLE D
A CK T E S H IJ L I P IR A A N K E R SO M A IL T O SA U D I

Year

Volatility wont disappear companies that mismanage it will

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Permanent volatility is one of a number of challenges that are making it increasingly difficult to maintain/improve supply chain performance and drive value
Rising Customer Expectations

Growing Complexity

Increased Stretch Growing Importance of Sustainability Accelerating Cost / Price Decline

C2S is a proven strategy to combat some of these challenges and maximize profitability

2009 Accenture. All rights reserved.

Stop and Think About Your Company:

Which Supply Chain challenges have been most difficult for your team to address?

1. Rising Customer Expectations 2. Growing Complexity 3. Increased Geographic Stretch 4. Growing Importance of Sustainability 5. Rising Volatility 6. Accelerating Price / Cost Decline

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Seven Imperatives for High Performing Supply Chains Overview

In their deployment of dynamic supply chains, supply chain masters consistently pursued seven actions which drive sustainable financial success.

Fi Bu t with s Str ines ate s gy

Clear Value Proposition

Value Delivery System Approach

Segmented / Aligned Supply Chain

Optimized Operating Model Architecture

Ab i Ex lity to ecu te

Selective Investment in Mastery

Right Analytics, Response Ability

Talent Powered By High Performance Culture

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Those Imperatives define a companys supply chain fit and ability to execute for High Performance
Fit
1

Clear value creation algorithm Value Delivery Systems Approach Segmented / Aligned SC Optimized Operating Model Architecture

Dreamers

High Performers

Losers

Efficient Under-Performers

Ability to execute

Selective Investment for Mastery

Right Analytics, Response Ability

Companies aspiring for High Performance must address all seven imperatives to be successful
2009 Accenture. All rights reserved. 11

Talent Powered By High Performance Culture

Stop and Think About Your Company:

In which of these 7 Supply Chain imperatives is your Company or Division: 1) best positioned for success, 2) have the greatest deficiency, 3) will allow your company to fair better and bounce back stronger? 1. Articulate a clear value creation algorithm 2. Approach the supply chain as a value delivery system 3. Segment the supply chain and align it with the characteristics of each segment 4. Optimize the global operation architecture for scale, access, and flexibility 5. Selectively invest for mastery in differentiating capability areas 6. Align the information system to support the right analytics, alignment, and response ability 7. Drive execution discipline with the right talent powered by the right performance culture
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Agenda
Strategic Context C2S Overview C2S in Action C2S Approach C2S Key Success Factors Questions

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Cost to Serve (C2S) Path to Profitable Growth

Objective Gain insight into true customer / product profitability through an understanding of the costs and drivers involved in serving our customers, at varying degrees of business granularity.

How does C2S Work? Breaks revenue and costs into functions and activities, which are allocated down to the desired level of reporting granularity; Product Customer Channel Time period

Revenue

Profit

C2S C2S
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C2S is a strategic imperative it enables us to balance the need to reduce cost with the need to grow demand
C2S enables strategic investment in growth Reduce C2S investment in generating and serving demand where the savings dont significantly impact revenue and growth objectives Invest in C2S where it is conducive to revenue and growth Reallocate C2S assets to products and customers where there is greater revenue and growth opportunity

C2S Levers
C 2 S /S a le s

Revenue

C2S
Business Growth

R evenue

Profit ROA

C2S

Portfolio/Products Supply Chain Sales/Sales support Promotion/Funds Marketing Special programs Menu/Bracket price

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C2S enables a view of true performance it highlights the relative and absolute performance of the disaggregated parts of a business
The product on the left loses $7.33/week due to high store and DC space costs, where as the second item contributes $7.38/week, despite it being 1/6th the price. This is because the first item turns much slower so pays more occupancy to the DC and Store
Gross Margin $ + Backend $ = $63 / unit Cost To Serve Profitability Metrics Contribution Margin = ($7.33) / unit Cost To Serve Profitability Metrics Contribution Margin = $7.38 / unit

Gross Margin $ + Backend $ = $12 / unit

$ 8.90

$ -0.28

$ -1.39

$ -0.07

$ -0.03

$ 0.05

$ 0.20

$ 29.18

Retail Price

COGS Gross Backen Dam Damage Obsol Shrink Vendor IB INV DC DC OB Store Store CM $ Margind Funds Allow s Cash Freight Carry Labor Space, Freight Labor Space, Discount Cost Other Other

2009 Accenture. All rights reserved.

$ 20.28

$ -.01

$ -1.18

$ -0.11

$ -0.01

$ 3.42

$ -0.37

$ -1.81

$ 7.38

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C2S enables a view of true performance it supports strategic investment and divestment decisions to improve over all corporate ROA
Absent C2S, every offering is viewed as having the same overhead costs as a result, net or contribution margin equals the gross margin minus average cost
160.0%

Cum Share of Margin $

140.0%

120.0%

100.0%

80.0%

60.0%

40.0%

Realized Profit

20.0%

0.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

Cum % of SKUs Margin $

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C2S enables a view of true performance it supports strategic investment and divestment decisions to improve over all corporate ROA
Introducing item centric C2S, we see that every item does not have the same overhead costs often many items actually deliver negative Contribution to Margin (CM) after all costs are considered
160.0%

140.0%

Cum Share of Margin$ & CM $

120.0%

Profitable

Unprofitable

100.0%

80.0%

60.0%

40.0%

Realized Profit

20.0%

0.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

Cum % of SKUs Margin $

2009 Accenture. All rights reserved.

CM $
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C2S enables a view of true performance it supports strategic investment and divestment decisions to improve over all corporate ROA
Recognition of where costs exceed revenue provides visibility to the cost invested in generating and supplying demand.

160.0%

140.0%

Cum Share of Margin$ & CM $

120.0%

Invested Cost

100.0%

80.0%

60.0%

40.0%

Realized Profit

20.0%

0.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

Cum % of SKUs Margin $

2009 Accenture. All rights reserved.

CM $
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C2S enables a view of true performance it supports strategic investment and divestment decisions to improve over all corporate ROA
Recognition of where costs exceed revenue provides visibility to the cost invested in generating and supplying demand. This cost is effectively being covered by profitable items or offerings, resulting in significant unrealized profit.
160.0%

140.0%

Cum Share of Margin$ & CM $

120.0%

Unrealized Profit

Invested Cost

100.0%

80.0%

60.0%

40.0%

Realized Profit

20.0%

0.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

Cum % of SKUs
2009 Accenture. All rights reserved.

Margin $

CM $

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C2S enables a view of true commercial performance it supports strategic investment and divestment decisions to improve over all corporate ROA
This cost is effectively being covered by profitable items or offerings, resulting in significant unrealized profit. The net impact on enterprise profit is significantly reduced realized profit
160.0%

140.0%

Cum Share of Margin$ & CM $

120.0%

Unrealized Profit

Invested Cost

100.0%

80.0%

60.0%

40.0%

Realized Profit

20.0%

0.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

Cum % of SKUs Margin $

2009 Accenture. All rights reserved.

CM $
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We invest in C2S so we can recognize our true cost to generate and serve demand, and apply this insight to altering our investment to yield grater return
The net impact on enterprise profit is significantly reduced realized profit The value of a granular C2S is to provide the insights needed to reinvest resources and realign the organization towards realizing greater profit
160.0%

140.0%

Cum Share of Margin$ & CM $

120.0%

100.0%

80.0%

60.0%

40.0%

20.0%

Greater Realized Profit

0.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

Cum % of SKUs Margin $

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CM $
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Agenda
Strategic Context C2S Overview C2S in Action C2S Approach C2S Key Success Factors Questions

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C2S In Action Improving the performance of the Shampoo category

This Shampoo study suggests how poor performing SKUs in the assortment drives up supply chain cost dramatically reducing category net profit SKUs vs. Profits
Shampoo- Medium Bottle Base Scenario 200.0%

66% of the SKUs C2S exceeds their GM$ so have negative profitability

% of Base Scenario Sales, GM$ or CM$

150.0%

100.0%

50.0%

Slow movement is likely a key contributor

34%
0.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

% of Base Scenario SKUs (items sorted by descending CM$) Base % of GM$

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Base % of CM$
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C2S In Action Optimizing the demand patters through changes in assortment drives more margin through fewer items-reducing labor per $ sold
Optimization outlines the improved net profitability performance when fewer items deliver the desired volume.
SKUs vs. Profits
Shampoo- Medium Bottle Base vs. Optimized (20% SKU reduction)

200.0% % of Base Scenario GM$ or CM$

Significant reduction in unprofitable items by shifting slow volume to more productive SKUs

150.0%

100.0%

50.0%

Optimization is trading customer up to higher gross margin items; a 6% improvement

0.0% 0.0% 10.0% 20.0% 30.0% 40.0%

50%
50.0% 60.0% 70.0% 80.0% 90.0% 100.0% % of Base Scenario SKUs

Base % of GM$
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Optimized % of Base GM$

Base % of CM$

Optimized % of Base CM$

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C2S In Action Leading Big Box specialty retailer

Objective Provide a consistent understanding of cost and profit across all busines functions and silos Provide sustainable decision support to reduce cost of operations and improved store and merchant demand planning

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C2S In Action Leading Big Box specialty retailer (continued)

SKU Score cards used by merchants to support line reviews, promoting decisions, vendor negotiations Store design scores departments for relative profitably and influence space allocation to improve store performance

Network planning decides the desired distribution lanes and ordering methods for different items
Store Shelf

Store
Buy at store Buy on line Buy from catalogue

Store Pick Up Distribution Center Home or office

Store Back Room

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C2S In Action High cost to serve in HBC due to each pick, inventory and stock costs
Opportunity: Optimize shelf inventory, order/pick count and frequency to achieve lowest over all C2S Solution: Understanding total distribution costs, consider inventory cost vs. labor cost Results: Over 60% of the items could afford larger orders, less frequently replenished, reducing item cost to serve by $5/item/store/year Annualized savings of 50+ basis points after adjustments for increases in carried inventory
2

Each Pick HBC

Each picking: Optimium order point/quantity by price (label=min shelf capacity; CC=8%, GM=35%, LT=3.5 dy, min OP=5 dy or 3 un)

18 14 11 10 8

25 18 14 10

20 14 10

Order point or quantity (units)

Example: Price: $3 Volume: 1/wk OP: 3 OQ: 9 Avg inv: 7.5 Min capac: 11.5 Wks/order: 9.1 Save: $4.784/st/yr

100

44 30 31 25

OQ @ $1 OQ @ $2 OQ @ $3 OQ @ $5 OQ @ $10 Order Pt

11 9 8 6 6

1 0.1 1 Units/store/week 10

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C2S In Action Leading Healthcare Company - Promotional Pack C2S

Opportunity Profitability of Special pack promos not well understood, even after the fact Solution Detailed ABC study of special pack promo costs User selects promo configuration options, estimates volumes; model calculates detailed promotional income statement projection Results Modeling of promotion economics added to promo approval process Eliminate blind commitments to uneconomical special pack deals Dramatically shifted promo strategy from special pack to deeper allowance on standard packs
2009 Accenture. All rights reserved.
Report date: Promo product composition: Promo case attributes: Promotion type: Display used: RDC distribution: Sales (List Less Allowances) Cost of goods: Open stock components Other product components Display cost Repack components Repack labor Royalty cost Return, rework & restock costs Total cost of goods Gross profit Activity based distribution costs: x.x min/pal @ $xx.xx/hr Plant warehouse labor xx min/pal @ wtd avg $xx.xx/hr RDC handling labor xx dy build, xx sell @$xx.xx/pal/mo RDC occupancy At xx.x% opportunity cost RDC inventory carrying costs Transport (plant/RDC/3rd party-RDCs) Wtd avg cost= $xxxx / TL Wtd avg cost= $xx.xx / cwt Distribution (freight to cust) Total activity based distrib costs Activity based devel/implem costs: Sales department Packaging design & devel External supply network Quality Control Imaging Design Management Category Promotion Team Financial services (FSV- cost acctng) Change Management Planning Purchasing RDC Packaging Specialist 10/13/03 13:36 36 x Product inputs- std cost sheet 12 Consumer units, 36 components; 0.54 CF; 12.6 lbs Value pack; Complexity= 5; Repeat=no None 40%NE (Hanover), 30%SE (Simpsonville), 30%WC (Fresno) Notes $ this promo $/Case % of sales Promo volume xx,xxx cs 400,000.00 40.000 100.00% 150,000.00 150,000.00 250,000.00 15.000 15.000 25.000 0.00% 37.50% 0.00% 0.00% 0.00% 0.00% 0.00% 37.50% 62.50%

Product inputs- std cost sheet

From RDC, copack & cust

445.46 599.53 1,270.30 4,931.51 2,718.36 8,568.00 18,533.15

0.045 0.060 0.127 0.493 0.272 0.857 1.853

0.11% 0.15% 0.32% 1.23% 0.68% 2.14% 4.63%

13,871.57 699.25 126.26 281.20 898.09 2,317.42 109.36 262.49 1,387.82 572.18 -

1.387 0.070 0.013 0.028 0.090 0.232 0.011 0.026 0.139 0.057 -

3.47% 0.17% 0.03% 0.07% 0.22% 0.58% 0.03% 0.07% 0.35% 0.14% 0.00%

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Agenda
Strategic Context C2S Overview C2S in Action C2S Approach C2S Key Success Factors Questions

2009 Accenture. All rights reserved.

30

Regardless of approach / scope, the same basic principles apply to conducting a C2S analysis
Step 1: Agree on objectives, scope and desired outcome Step 2: Identify, study and map current and new activities to in scope processes Identify discrete high level activities which occur along the supply chain for in scope processes, and link those activities together to create a picture of the relevant steps which contribute to the cost of completing the process.

Step 3: Determine appropriate cost drivers

Step 4: Develop a conceptual model & validate outputs

Base Scenario 15% Cost to Serve Optimize Space & Assortment

P e rc e n t o f R e ta il S a le s

12% 9% 6% 3% 0%

Direct Store Labor DC Occupancy & OH

Store Occ., OH, Other DC Inventory

Store Inventory DC - Store Transportation

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Agenda
Strategic Context C2S Overview C2S in Action C2S Approach C2S Key Success Factors Questions

2009 Accenture. All rights reserved.

32

Cost to Serve Key Success Factors

C2S is about being approximately right versus precisely wrong Be Clear on Objectives gain agreement amongst all key stakeholders on the objectives, scope and expected outcomes / actions Be thorough on data availability, integrity and hierarchy Focus on costs which can be logically allocated to products / customers and are within an organizations control Use a standards-based approach whenever possible to support easy what if modeling to prove value and generate constant output over time Avoid temptations to chase granularity which can be impractical or difficult to leverage Begin with a proof of concept, then scale as methodology and results are validated

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How would C2S benefit your business?

Marketing Differentiated customer service strategies? More effective use of promotional space and advertising? Portfolio Impact on assortment decisions and pricing strategies / decisions? Expansion / Contraction of channels? Space Optimization? Vendor Collaboration Align trading terms based on true cost? Real profitability info to leverage in discussions with vendors? Supply Chain Tradeoff decisions on how best to flow product to the customer? How best to position / consolidate your physical supply chain?
2009 Accenture. All rights reserved. 34

Questions

????

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